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PNC’s Point of View editors asked Justin Sullivan, Certified Financial Planner® and investment market manager, southeast, with PNC Wealth Management® how the average person can start investing. Here’s what he had to say:
Sullivan: It all starts with budgeting. Investing essentially means putting your money at risk with the hope of a greater return, so you need to make sure you have money available for everyday living expenses and you have an emergency fund. You’re not ready if you’re living paycheck to paycheck or couldn’t handle an unexpected $200 expense. You should hold off on investing until you have a better safety net.
Once your emergency savings is enough to cover three-to-six months’ worth of your everyday expenses, then that’s a good time to start investing. You can put some assets at risk without putting your everyday financial security at stake.
A lot of times it’s easiest to start through a workplace 401(k) plan. If your employer matches your contributions, that’s a good baseline of how much of your salary to start deferring to the plan.
Again, while it’s convenient to invest through a workplace 401(k) plan, it doesn’t make sense to invest if you’re living paycheck to paycheck – so if you’re serious about getting started, you’ll need to consider making changes to your budget so that you can prioritize investing for your future.
Sullivan: There is no minimum required to start investing on your own. The most important part is to start and to be consistent. Set up regular deposits into your investment account - maybe once every paycheck, once a month or once a quarter.
Sullivan: Most people who are new to investing have limited resources. It’s best to look into mutual funds and exchange-traded funds (ETFs), which will instantly give you diversification instead of choosing one or two stocks. You don’t want to put all your proverbial eggs in one basket.
Sullivan: Thanks to the internet, there are many resources out there. A quick Google search on a company you’re interested in can provide a lot of detail. Even financial podcasts, TV shows or radio programs can provide a lot of information; however, to successfully invest in stocks, you need to be able to analyze financial statements and have quantitative expertise. For this reason, investing in mutual funds is an ideal starting point: it allows you to invest in stocks while leaving the heavy lifting of research to the experts managing the fund.
Sullivan: Your investment time horizon, or how long you plan to invest the money before you cash out, is one of the most critical components of investing. If you have a lot of time before you need the money – i.e. you have decades to go before retirement – then it makes sense to invest in assets that have a higher propensity for growth. You can take on more risk because you have more time to go through market ups and downs in order to get greater returns.
Companies labeled as growth stocks, like those in the information technology sector, would be appropriate for someone who has many years before they need the funds– as long as your risk tolerance is high enough to withstand some ups and downs over time.
Sullivan: At the outset, don’t think about a specific number at which you want to buy or sell a stock. Instead, decide on your goals. Periodically review your portfolio to make sure that the investments are keeping you on track to meet those goals. If they are not, then it might make sense to consider buying or selling.
As a new investor, don’t focus on market timing, and don’t chase returns. Not only is it pretty much impossible to time the market, but you need to factor in taxes and trading costs associated with constantly moving in and out of positions. Most investors are rewarded for holding investments long-term and not getting seduced by the idea of a quick purchase or sale.
Sullivan: I would recommend quarterly reviews. If you’re investing in companies, they’re reporting earnings on a quarterly basis. As an investor focused on fundamentals, a quarterly review timed with earnings season makes a lot of sense.
On quarterly earnings, new investors should watch general trends. For example, what percentage of companies have been profitable and how much have they earned relative to what industry experts expected? One red flag to be mindful of is how companies manage to be profitable for the quarter and whether or not that cause is sustainable. Were the profits made by selling more products and generating revenue? Or did they make a profit because they cut expenses by laying off employees? Just because a company has a good quarter doesn’t mean you should instantly buy their stock.
Sullivan: You can start by asking your bank if they have investment professionals or search for advisors in your area. Hiring an investment professional can help in so many different ways. Not only because of the experience and knowledge they bring to the table, but also the psychological aspect of it. You want someone who can remain calm when markets become turbulent. You may be tempted to sell when the market is volatile or uncertain, while an investment advisor can help you make a smart decision. It’s important to have someone to bounce ideas off of instead of going at it alone.
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